U.S. Office Sector: Demand For Office Space Highest Since 2006

U.S. Office Space In Demand

DTZ, a commercial real estate service provider, reported that U.S. businesses expanded into more office space in 2014 than they have in eight years and that rents increased in 70% of the country.

The U.S. office sector ended 2014 on a strong note, absorbing 21.4 million square feet (msf) of office space in the fourth quarter, up 47% compared to the same period a year ago. In 2014, U.S. office markets collectively absorbed 70.2 msf, making it the strongest year of demand since 2006. U.S. vacancy fell 30 basis points (bps) from 14.8% in the third quarter to 14.5% in the fourth quarter. Of the 80 metros tracked by DTZ, 61 reported fourth-quarter occupancy gains.

Kevin Thorpe, DTZ’s Chief Economist, Americas, says that the office sector was one of the slowest real estate sectors to recover, but job growth is now fueling stronger occupancy gains.

“If one annualizes the second half of 2014, the office sector has been absorbing space at nearly twice its historical average,” Thorpe said. “For most of this recovery, shifts towards space efficiency—lower square feet per worker—dampened aggregate demand, but robust job creation has taken over as the dominant force. Fundamentals still vary greatly by location, but the latest demand metrics can no longer be characterized as subpar. This is robust.”

The fourth quarter report reveals that both rental rates and development activity are heating up. Average asking rents in the U.S. rose 2% compared to a year ago to $22.57. There was 105 msf of new office space under construction as the year closed, up 76% compared to a year ago.

Thorpe added, “Economic fundamentals are increasingly compelling for developers to move forward with new projects. With real GDP growth nearly touching 5%, job creation at a 15-year high, lower gas prices, low interest rates, and rising business and consumer confidence, there is little to suggest that leasing fundamentals will not continue to tighten in most markets in 2015.”

Regionally, net absorption in the West increased by 89% from 2013; the South was up 36%; and both the Midwest and the Northeast were up 1.2%.

For 2014, the top 10 strongest markets in terms of demand for office space were New York, with 9.2 msf of net absorption; Houston, with 6.6 msf; San Jose, with 4.4 msf; Dallas, with 4.0 msf; San Francisco, with 3.3 msf; Atlanta, with 3.0 msf; Denver, with 2.5 msf; Phoenix, with 2.3 msf; Seattle, with 2.3 msf; and Boston with 1.8 msf.

The top 10 strongest markets in terms of rent growth were San Francisco, with 17.2% year-over-year rental appreciation; Houston, with 9.0%; New York, with 8.5%; Phoenix, with 7.2%; San Mateo County, CA, with 6.9%; San Jose, with 6.4%; Dallas, with 5.5%; Denver, with 5.4%; San Diego with 4.4%; Raleigh with 4.3%; and Austin with 4.2%.

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